VATMESS – Poor old small business #VATMESS #Marketplace #EU

Rachel talked about the Horrible Implications of the EUVATPlace of Supply Change, and over the last few days the issue seems to have properly picked up interest from communities of micro-businesses. This post is not to debate the ruling, I personally think it a terrible move for small businesses and am frustrated thatHMRCdid not advertise it more widely. That said, as a business we have to comply with all kinds of things and so this post is just to try and state what complying with the change means.

During my time working at PayPal – I raised this issue, along with contacts at Etsy, and other marketplace providers.

Whilst we did take calls and I pushed the agenda – everyone including the government has taken a bit of a back seat here, perhaps because it simply doesn’t impact the establishment, just the hard working entrepreneur.

I am not aVATexpert, however I have experience in running aVATRegistered business, dealing with the current EC Sales returns and am registered forMOSS. TheHMRCand European documentation tends to assume businesses areVATRegistered and have some basis for understanding of things such as “place of supply”. This is not the case for many micro-businesses.

WHAT ARE THE DIGITAL PRODUCTS AND SERVICES THAT FALL UNDER THIS CHANGE?

The ruling covers downloads of digital products and services that are provided electronically, such as:

ebooks

music downloads

knitting and craft patterns

downloadable software

Software as a Service

webhosting services

Downloads of training course videos

Things that don’t fall under this are services that you provide in person. As an example if you have a service where you design an ebook cover for a customer, that would not fall under the these rules as you are providing a unique, hands-on service to the customer. If you sold template ebook covers that customers could buy, download and edit themselves that would fall under the ruling.

The same is true for training. If you deliver training via video where you are live on air at the same time as your customer, delivering the training that is still taxed in the same way as now. If you sell videos of you delivering training then that would be liable forVATat the customer’s rate.

It’s not so much the digital part that matters, both examples above are “digital services” it’s the hands-off part that changes the place of supply from where the supplier is to where the customer is.

THIS IS B2B ONLY, IF I ONLY SELL TO BUSINESS CUSTOMERS CAN I AVOID IT?

Yes, on paper. No in practice it seems. The only sure way to identify a business customer is via theirVATnumber. The existingVATrules (and this doesn’t change) allow an EU business selling to an EU business in another member state to sell a product without addingVAT. The seller then records the payment and submits it with their EC Sales List. The purchaser then accounts for theVATdue in their ownVATReturn under the Reverse Charge rules. The “place of supply” in this case is always where the customer is, but because the seller doesn’t need to charge theVATwe don’t run into these issues – we just have to validate the customerVATnumber to prove they have one and are not in the same member state as us.

Many small businesses and freelancers are notVATregistered and so will generally need to be treated as a consumer for tax purposes.

I AM A UK BUSINESS SELLING EBOOKS, NOT CURRENTLY REGISTERED FORVAT. WHAT ARE MY OPTIONS?

Stop selling your books to EU countries other than the UK

Sell via a distributor who deals with theVATand pays you a royalty

Register forVATin every EC Country you sell to

Register forVATin the UK, andVATMOSS

I THOUGHT THAT AS LONG AS I WAS BELOW THE MINIMUM THRESHOLD FOR VAT, I DIDN’T NEED TO CHARGEVAT.

The UK benefits from a very high minimum threshold before you are forced to register. So this was the case when the place of supply for digital services was the UK.

However there is no minimum threshold for payments to another EU country, so when the place of supply changes to where the consumer is you are liable for theirVATeven if you sell a single 1.99 ebook or knitting pattern.

This has led to this situation where people nowhere near theVATthreshold, in fact people who may not even be earning enough to pay income tax, could be forced intoVATRegistration.

WHAT IS THEMOSS?

Currently if you areVATregistered you chargeVATon these products at your own country rate. So for the UK 20%. You then send aVATreturn which details how muchVATyou have collected, deducting anyVATyou are claiming back and payHMRCtheVATowed. After Jan 1 you need to do this individually for each country you have made sales in.

TheMini One Stop Shopis a service that allows you to avoid registering forVATin every country. You charge the correct amount ofVATfor each sale and then report it in yourMOSSreturn, and pay theVATdue. TheMOSSthen distributes theVATcorrectly to each country.

You need to register forVATin order to use theMOSSto pay the EUVATthat is due. This is why small businesses are being forced into registration.

WHICH COMPANIES CAN I SELL THROUGH WHO CAN ACT AS AN INTERMEDIARY?

If your products are sold via a company who essentially sell the product for you and whose name appears on the invoice that is sent to the customer, this can protect you from registering forVAT. In that case the company making the sale deals with theVATliability. This may be the simplest way of dealing with the issue for people with a low number of sales that fall under this ruling.

I AM ALREADYVATREGISTERED, WHAT DO I NEED TO DO?

You need to register for theMOSSunless you are very keen to register forVATin all EU Countries. You can do this via your existing onlineHMRCaccount. Once registered you will be required to submit your first return in April 2015, this will cover Jan 1 – Mar 31 2015, so you need to keep all the required records from Jan 1.

You need to ensure that the systems you use for taking payment for your product can identify the location of the customer and charge the correct amount ofVAT. You canread how I am implementing this for Perchhere.

I AM NOTVATREGISTERED BUT THINKING ABOUT IT. WHAT ARE THE IMPLICATIONS OF BEING REGISTERED?

You can voluntarily register forVATeven if you are below the threshold. If you do this then you will need to submitVATReturns and potentially EC Sales lists. You will also need to chargeVATon all of your sales, including to UK customers.

If the majority of your sales are toVATregistered business customers then registering forVATdoesn’t make you more expensive in real terms.VATregistered companies pay theVATand claim it back in theirVATReturn. Claiming backVATis the real benefit of beingVATregistered for small businesses. For example if I purchase a computer at £1,000 inc.VAT, I can claim back £200 in my nextVATreturn.

If the majority of your sales are to consumers of very small businesses who are notVATregistered then you either become more expensive by adding 20%VATin the UK on top of your charge OR you take a cut in profit by paying thatVATyourself.

OnceVATRegistered you need to make sure you send correctVATinvoices to your customers so they can claim back theVAT.

It is a lot easier to beVATregistered now than it used to be, I deal with myVATreturns and EC Sales Lists throughXero, and it really is just a case of checking that everything looks correct and submitting the data every quarter. You are likely to need to help of an accountant however to make sure your record keeping is all correct.

If you are considering doing this I would suggest starting the process now in order that you are all set up when the new rules come into force in January.

I AM OR WILL BEVATREGISTERED AND SELL VIA PAYPAL/STRIPE ETC. HOW DO I PROVE THE CUSTOMER LOCATION AND DECIDE WHATVATTO CHARGE?

If you are selling directly through Stripe, PayPal or another payment provider that does not handle invoicing andVATfor you, then the simplest option may be to use a third party service that hooks into your existing processes and does this part of the job. Example services are:

Or you could move to a full e-commerce solution that is able to handle theVATrequirements.

I AM OR WILL BEVATREGISTERED AND SELL VIA A SHOPPING CART SYSTEM, BUT AM NOT A DEVELOPER, HOW DO I ENSURE I AM CHARGING THE RIGHTVAT?

You are in the hands of the provider that you are using. If they have not released information about how they will comply with the new rules from Jan 1, you should contact them and ask. If you get a response do let me know. I will add links to the GitHub site to help anyone needing to find an alternate provider.

I’ve writtena post for Selz.coma hosted solution for selling digital and physical products, this details some of the possibilities for people in this situation.

DO I NEED TO REGISTER AS A DATA CONTROLLER?

The rules state that you have to collect proof of customer location in two different ways and store this data for 10 years. The data you have to collect is personally identifiable information and therefore might make youliable to register as a data controller

I’ve seen reliable sources state this is not true, along with other sources that say it is. It would be good if theICOcould state whether the additional data collection requirements for the newVATrules would make registration necessary.

I AM A BUSINESS OUTSIDE OF THE EU, WHAT DO I DO ABOUT THIS?

Businesses outside of the EU should have been chargingVATto EU customers and paying theVATdue for some time now however this has not been enforced.There have been suggestionsthat this ruling will now be more strictly enforced.

You can register forMOSSas a non-Union company by choosing a country to register in. If you are an English speaker then Ireland or the UK would probably make sense as the documentation would at least be comprehensible.

You would then need to follow the same rules as an EU based business in terms of charging the correct amount ofVATto EU residents and paying theVATdue viaMOSS.

So – how can you get help?

The small business consultant

Well – I’m plugging my own services here, but get in touch with me and I can wither help you out or signpost you to further advise.

As always, let’s crack on… panic not to much.

Onwards…

Tom

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Published by ItsClem

Tom is an eCommerce, payments, tech startup, marketing and retail professional. With 15 years experience in multi-channel - yes I've worked in a real shop.
Currently freelancing - I help startups and growing businesses through planning, business development, channel strategies, operations overhauls and quite often just some sage words of wisdom.
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